Haggle for Your Dream...

Buying a car was never so easy and never before has the Indian consumer had

so many choices. Not only are there new models in every segment–from mid-sized

family cars to sports utility vehicles and luxury sedans–the car finance

market has also become very competitive. And while the customer today is very

much in the driver’s seat, the wide range of car finance options can be quite

bewildering. For most buyers, issues like choosing the best dealer and scheme,

picking a trustworthy lender and deciding which among the seemingly endless

permutations and combinations of financing schemes suits your purpose, can be

unnerving. How do you make sure that the car you are finally driving home is the

one you have got a great bargain on? Like elsewhere, information is power and it

is best to arm yourself with whatever there is to know on the subject.

Step 1: Best man in



So you have identified the vehicle of your choice? It’s now time to go after
the car dealers and negotiate a price. In this phase, your skills as a haggler

are on test, and there are huge monetary incentives to drive a hard bargain.

Such is the level of competition that virtually every dealer offers discounts or

‘subventions’ as they are called. And hold your breath, these discounts can

save you anything between Rs 3,000 to Rs 30,000 depending on the model, color,

dealers’ inventory status and timing of your purchase.

Dealers usually have monthly targets to meet and hence month-ends are the

best time to negotiate for heftier discounts. Besides, if you are one of those

who is not bothered about auspicious months and days, chances are that you will

get a better deal. The trick is to buy during the so-called ‘inauspicious’

months. Additionally, you can negotiate lower prices on a vehicle that may have

overstayed in a dealer’s showroom. So have you decided on your dealer? The

next step is to understand the different schemes on offer.

Step 2: The real deal...



It is a buyer’s market and there are schemes to suit every need. However,

for a better deal, examine the terms and conditions of a particular scheme

carefully. This will give you an opportunity to weigh the pros and cons of

various schemes before judging which one suits you best.

Margin Money/Down Payment: Simple and easily understood, this is the

most popular scheme and is offered by all financiers. The customer pays minimum

margin money upfront. The financier funds the balance. Interest is charged on

the amount funded and instalments are collected on the same day as disbursal of

credit. The margin money is determined on the basis of make and model, tenure of

the loan, and the creditworthiness of the borrower. The amount financed is a

percentage of the ex-showroom price of the car, popularly known as LTV (Loan to

Value Ratio). The LTV ranges from 75% to 95% of the ex-showroom price. Normally,

the financier expects you to pay for the insurance and road tax over and above

the margin money.

Instalment in Advance: These are usually 0% interest

schemes and margin money on the car is collected under the guise of advance

instalments. However, under this scheme, 100% value of the car is considered for

loan. Usually two to five instalments are collected in advance and are adjusted

against the last few instalments. What this means is that in a three-year loan,

if four instalments are collected in advance, then you repay only 32 instalments.

Structured Option: While monthly instalment is

constant in most schemes, a structured scheme offers built-in flexibility to

step-up or step-down the instalment amount. In a typical three-year structured

step-up scheme, instalments can increase progressively from year one to year

three. Conversely, in a step-down scheme, instalments would progressively

decrease from year one to year three. There could also be a combination of

step-up and step-down instalments. Financiers for salaried employees normally

offer this. This scheme is very useful to manage predictable upswings and

downswings of disposable income.

Security Deposit: In this scheme, 10% to 25% of the

value of the car is taken as a security deposit. This could be with no interest,

with simple interest or with compound interest. Theoretically, the financier

funds 100% of the value of the car but in reality, his exposure is lower by the

amount of deposit collected. The interest charged would be on the full amount

and the instalments will be collected on the same. The security deposit along

with interest if any, is refunded at the end of the contract. However, remember

that if the interest on the security deposit exceeds Rs 2,500 per annum, TDS

@11.5 % will be cut. Now that you have decided on your kind of finance scheme,

it’s time to zero in on the financier who can give you the best deal.

Step 3: The financier



Most car dealers have tie-ups with different private banks, including

foreign banks and non-banking finance companies (NBFCs). The interest rate they

offer and the terms of lending vary within a small range depending on the make

and model of the car, the loan tenure and the type of lending scheme. However,

remember that while opting for a loan from a lender attached to your dealer may

save you some legwork, it doesn’t always protect your interests.

However, if you do shop around, you’re sure to be rewarded

with better deals. Approach lenders directly and drive a hard bargain in the

same way as you did with the dealer. Some lenders may offer attractive interest

rates, on condition that you go to one of the dealers that they have an

arrangement with. Under this arrangement, the lender gets an incentive from the

dealer for directing customers his way. But if that means having to forgo the

discounts you may have negotiated with the dealer of your choice, the deal isn’t

the one for you. Ask for the same discounts that you had negotiated with your

dealer or threaten to walk away. The fierce competition usually forces the

lender to agree to the choice of dealer. They can’t afford to lose a customer,

can they? This way, you get twin benefits–best discounts you’ve negotiated,

as well as the best financing scheme.

Shubhendu Parth in

New Delhi

Read Before You Sign on the Dotted Line

Hidden costs: These can be typically in the form of service charges,

documentation charges and processing fee, etc all of which increase the total

amount of your loan. A financier could charge you a lower rate of interest but

may actually be extracting a lot more from you through any of these charges.

Typically, other charges like value added tax (VAT) and turnover tax (TOT) may

also have to be paid depending on the financier and the scheme. These too

increase the cost of your vehicle.

Pre-payment charges: Most financiers discourage one from pre-paying a

loan, as this is less profitable for them. So they levy fixed pre-closure

charges on the balance principal which at times can be as high as 4% of the loan

amount. What this means is that on a loan of Rs 4 lakh and a balance principal

of, say, Rs 2 lakh, you could end up paying pre-closure charges as high as Rs

8,000. And while some financiers allow for part pre-payments others insist on

only full pre-payments. Also, there are certain companies who only allow

pre-payment up to 25% of the principal in any given year. When comparing like

offers, it is important to check the pre-closure charges and terms if you intend

to pre-pay the loan before the contracted tenure.

Instalment due dates: Be careful about when you pay your first

instalment since this has an impact on the lending rate. If you pay your first

installment on the first day you will end up paying more since this does take

into account the fact that your principal loan amount is reduced by the first

EMI. But if you pay your first EMI a month later, interest will not be charged

for the first EMI. Naturally the second option is less expensive for you.

Amortization schedules: You normally pay monthly installments to your

financier. This amount has two components–an interest repayment and a

principal repayment. The amount paid towards interest and principal varies each

month. This is called amortization of the loan. Though financiers follow

different methods of accounting for the monthly interest and principal, it is

important to keep a tab on this, particularly if you intend to prepay the loan.

This will help you calculate the remaining principle accurately.